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Background
Four statutory duties under the Companies Act 2006 come into force on 1 October 2008 which company directors must adhere to:
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a duty not to accept benefits from third parties
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a duty to disclose any interest in a proposed transaction or arrangement with the Company and a separate and independent duty to disclose any interest in an existing transaction or arrangement with the Company (transactional conflicts)
- a duty to avoid conflicts of interest (situational conflicts) unless authorised.
The Act allows Board to authorise of situational conflicts where the directors have the relevant powers.
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Directors' own responsibility
It is emphasised that the above duties are the personal responsibility of each director and not of the company. Only directors will ultimately be aware of any actual or potential situational conflicts. Directors should ensure that they keep these duties under review and inform the rest of the board on an ongoing basis of any change in their respective positions.
Transactional conflicts are not the same as situational conflicts and different rules apply to each (see below for more information). Situational conflicts require prior authorisation to avoid a breach of duty. Transactional conflicts require directors to declare their interest and under the company's Articles of Association they cannot vote on a Board resolution relating to the relevant transaction. Failure to declare an interest in an existing transaction or arrangement with the company is a criminal offence whereas a breach of the other duties could only give rise to civil claims against a director.
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Duty not to accept benefits from third parties
A director has a duty not to accept a benefit from a third party conferred by reason of his being a director or doing (or not doing) anything as a director. This duty does not apply if the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. If a director is in doubt whether any benefit is permitted, he or she should seek clarification from the company's board before acceptance.
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Duty to disclose any interest in a proposed or existing transaction or arrangement with the company (a transactional conflict)
Directors continue to have a duty to declare an interest in a proposed transaction or arrangement with the company and also in an existing transaction or arrangement with the company. Their interest may be direct or indirect and interests of their connected persons may also be captured. These duties are broadly similar to the requirements of the existing law.
It should be noted that:
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transactional conflicts include auctions and tender processes;
- a transactional conflict where the transaction results in an ongoing relationship with the company may become a situational conflict.
If a director becomes aware that he or she has a direct or indirect interest in an existing or proposed transaction with the company, she/he should notify the Board at the next Board meeting or by a written declaration. Interests in proposed transactions should be notified before the transaction is entered into and directors have an ongoing duty to update any changes in these interests.
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Duty to avoid conflicts of interest (situational conflicts)
From 1 October 2008 directors have a duty to avoid a "situation" in which there is, or may be, a conflict between the interests of the company and the direct or indirect interests of the director or between the director's duties to the company and to another person. The 2006 Act has introduced a new statutory power for a board to authorise such situational conflicts, provided this is done in advance. Boards of public companies and existing private companies must be authorised to deal with conflicts before directors can approve these.
This change in the law will require the company to operate more formal procedures regarding conflicts of interest but provided a potential situational conflict has been authorised, the change should not result in directors having to behave in a different way than they would at present.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
